Why The Rest Of The World Could Push The U.S. Into A Recession

As the old saying goes, “When America sneezes, the rest of the world catches cold.” But these days, with the rise of other economies and globalization, could the reverse be true?

In the past, economic problems abroad were at best curiosities for the U.S. None of them was sufficient to rattle the dominant American economy, which continues to be the world’s largest at an estimated $21.3 trillion. In 1997, it was the Asian Tigers in trouble. In 1998, it was Russia. In 2011-14, it was the southern tier of Europe.

This time, though, a whole range of big nations are in worsening economic shape. And with exports 13% of the U.S. economy, the ill health of the other major economies is something to watch with big-time concern.

At the moment, the U.S. apparently is headed for a slowdown, but not necessarily a recession. American consumer confidence is robust, even though it dipped a bit lately. Manufacturing, particularly of cars, is weakening, yet that industry now is a fraction of GDP. The stock market is up nicely, despite Friday’s slide, with the S&P 500 ahead 13.6% for 2019. Goldman Sachs predicts it will rise another 7% by year-end. Credit is cheap, with interest rates still very low, and perhaps going lower.

While the economic growth rate fell to 2.1% in the second quarter, from 3.1% in the previous period, a slow expansion in the 2% range is what’s been the norm in the post-crisis era.

There are new forces at work these days, however. when Federal Reserve Chairman Jerome Powell cites worries that impelled the Fed to lower short-term rates July 31, he zeroes in on the trade conflict. That’s a direct threat from overseas. Combined with the malign influence of sickening economies elsewhere, the U.S. might be the one hacking and wheezing due to everyone else’s sneezing.

Individually, the impact of one foreign nation’s woes would seem to have a minor impact, at most, on the US. Take the upcoming exit of Britain from the European Union, which is shaping up to be a disorderly mess.

Andrew Hunter, Capital Economics’ senior U.S. economist, pointed out to CNBC that U.S. sales to the UK are not large enough for a compression of British-bound exports to hurt the American economy. At worst, he went on, “a no-deal Brexit could cause a period of volatility in global financial markets which, if it was sustained, might weigh on U.S. growth.”

But what if a collective failure occurs? While exports are just 13% of the American economy, a cascade of falling dominoes offshore might do some damage that other, smaller woes could not.

Britain ‘s economy contracted 0.2% for the second quarter, following an anemic 0.5% advance in the year’s first period. A no-deal Brexit this fall stands to make matters worse, and the rule of thumb is that two consecutive quarters of shrinkage means a recession has taken hold. Germany, the industrial powerhouse of Europe, had similar results. It is heavily dependent on exporting cars, which are in a slump worldwide. The Ifo survey of German business confidence survey sank to the lowest level in seven years.

Elsewhere in Europe, Italy is already in a recession, and has been since 2018. It is groaning under one of the globe’s worst debt loads, and its shaky government looks ripe for a fall.

In Latin America, Argentina is in a recession that only seems to get worse. Inflation is running rampant, the Argentine peso is plummeting and the Buenos Aires stock market since early August has been halved. On top of that, its president was defeated in primary elections, meaning more political turmoil lies ahead. Fear is rife that Argentina won’t be able to pay its debts.

Brazil, which has the biggest economy in South America, is looking at a second possible negative quarter. Slumping commodity prices are hurting it, and even strong expectations for the Brazilian soybean crop—which should benefit from China's stiff tariffs on U.S. soybeans—aren’t panning out. Mexico, the U.S.’s third largest trading partner, also is facing a second straight down quarter.

In Asia, South Korea is encountering woes with growth , too, with a negative first quarter and a positive second that analysts don’t believe will last. Seoul is embroiled in a trade war with Japan, and South Korea's signal electronics and semiconductor export are off by a third. Even Singapore, a mighty city-state and financial nexus, is feeling pain, with a 3.3% economic contraction in its recent quarter. The side-effects of the Sino-American trade tiff are to blame.

Today, the U.S. economy appears to remain strong, albeit with some fraying around the edges. Let’s see if the outside world will spoil this nice picture.